Moody’s Investors Service has announced that it has upgraded retailer Tesco to a Baa3 ‘investment grade’ rating, up from a Ba1 ‘speculative grade’ rating, following a positive profit forecast by the retailer.
The ratings agency reported that, over the past few years, Tesco has ‘successfully enhanced price competitiveness, product availability and quality perception’, while also making ‘material cost savings’ to support margin recovery.
However, it added that competition in the UK marketplace is ‘significant’, with the expansion of the discounters impacting margins in the retail sector.
Improved Performance
“Today’s upgrade reflects the improvement in Tesco’s operating profit over the last few years and our expectations of continued profit growth, cash generation and debt reduction amidst a challenging competitive environment,” commented David Beadle, a Moody’s senior credit officer and lead analyst for Tesco.
Moody’s noted that Tesco reported an operating profit of £2.2 billion (€2.46 billion) in full-year 2019 – a 34% increase on the previous year – while the business is also seeing benefits from the integration of the Booker business.
‘Moody’s expects the company will achieve its targeted 3.5%-4.0% group operating margin (pre- Booker) in fiscal 2020,’ a statement read.
Debt Reduction
In addition, it reported that the retailer’s credit profile has been ‘enhanced’ by a material reduction in debt levels, to £18.7 billion (€20.87 billion) at year end 2019, compared to £26.1 billion (€29.13 billion) two years previously.
‘Moody’s expects continued improvement in this and other credit metrics during fiscal 2020, when profit growth will be driven by additional synergies expected from the Booker acquisition, as well as ongoing operational improvements across the business,’ a statement read.
It added that Tesco’s strong liquidity offers ‘important financial flexibility to manage working capital’.
Last week, at its Capital Markets Day, Tesco announced that it is targeting further margin improvements beyond the end of its recovery plan, with the retailer eyeing ‘untapped value opportunities’, according to chief executive Dave Lewis.
© 2019 European Supermarket Magazine – your source for the latest retail news. Article by Stephen Wynne-Jones. Click subscribe to sign up to ESM: European Supermarket Magazine.
